For all the attention that Bitcoin receives in the news, the most interesting peculiarity of this crypto-currency has largely been ignored. Sure, we’d all like to know whether the currency will ultimately succeed without any ties to a real-world economy. And Bitcoin’s rapid fluctuation in value over the past six months has certainly turned some heads.
But how Bitcoins are actually created is all too often overlooked. The currency isn’t minted at will in a factory setting. Bitcoins don’t just magically appear out of thin air. Instead, they’re the products of complex software algorithms that run day and night on incredibly powerful computers. So who, exactly, has the pioneering spirit to “mine” the virtual currency, converting CPU and GPU cycles into something of real-world value?
It takes time, dedication, and an extraordinary amount of water-cooled PC hardware. Meet Eric. He's one of the converted. (Eric's name has been changed by request to protect his identity: "I'd rather not broadcast to the world that I have that much liquid currency under my control," he said.)
"Most people approach mining with the hopes that they'll turn a profit, but to me, it's more about creating a freestanding currency," Eric said. Luckily for him, profit came with the package.
Eric has been mining Bitcoins since 2010, and at one point quit a high-paying job as a software engineer to devote all of his time to, figuratively speaking, extract gold from silicon. His move was bold and risky, but yielded an awesome reward: To date, Eric has accumulated 2500 bitcoins, which is worth a cool $191,900 as of this writing. (At Bitcoin’s highest exchange rate, that amount was $665,000.) He doesn't trade them and has no immediate plans to cash out. Instead, he's hanging on to them, and waiting to see how their value changes.
With Bitcoin gaining traction as a viable currency, more and more people are interested in mining for a piece of the digital pie. However, mining for profit is more difficult than just loading up some software and watching the cash flow in. As Eric’s experience vividly shows us, Bitcoin mining requires a considerable investment (and intestinal fortitude) just to get started.
Number crunching for gold
To understand this mining, you have to understand Bitcoin itself. Roughly put, Bitcoin is an electronic currency that isn’t tied to any country or economy—it’s decentralized. Its value is constantly changing (just like any other currency), and saw an all-time high back in April of $266. It’s currently resting at $76.75 USD per single Bitcoin.
In order to buy, trade, or use Bitcoins, the units of currency have to first be introduced to the market. And that’s where miners come in. Bitcoins themselves are algorithm-based mathematical constructs, created by a developer with the pseudonym Satoshi Nakamoto. Bitcoin mining software runs the Nakamoto algorithm, crunching numbers to solve this complex math problem. When an answer is found and verified as correct, a block of Bitcoins is rewarded to whoever found it. Current blocks contain 25 Bitcoins, but the block size goes down by half every four years, making mining harder and less profitable as time goes on.
Bitcoin miners run specialized computer setups that constantly run the mining algorithm in hopes that a block of coins will be found. Currently, there are roughly 11.4 million Bitcoins in circulation—that number will cap at 21 million in 2140, according to the algorithm’s limitations.
Eric first got involved with Bitcoin in December 2010. He was interested in learning more about electronic currency, when he stumbled across Bitcoin in an online forum and was immediately intrigued.
“Understanding how Bitcoin worked gave me a lot of confidence in it,” Eric said. Instead of starting out slowly by buying a couple of coins—which were roughly $0.30 per Bitcoin at the time—Eric decided to jump right in and dabble with mining. But first, he had to get the right gear.
Back in 2010, when Bitcoin was in its infancy, miners relied on CPUs to get the job done—so basically, your home PC could handle mining with the right software. Eric started with his home desktop setup. Shortly thereafter, miners discovered that it was more efficient to mine using the GPUs on graphics cards. They’re about 50 to 100 times faster and more powerful than CPUs for the workload Bitcoin mining requires. So Eric invested in two ATI Radeon dual-GPU cards, and watched the coins start flowing.
The more Eric made, the more he expanded his rig. Since 2010, Eric estimates that he’s invested about $50,000 in graphics cards, CPUs, circuit boards, and memory. He’s also employed water-cooling technology—pumps, tubing, radiators, and other parts—to run his mining operation at maximum efficiency. All this gear costs money, not counting his electric bill, of course.
Heavy GPU mining poses two major problems: power consumption and heat generation. GPU mining is a major power-suck—miners collectively gobble up about 3,176 megawatt hours of electricity per day. Eric worked his way around an insanely high energy bill by applying for a commercial license to power his home.
To combat the heat, Eric got a little crafty: He integrated a cooling system with his backyard swimming pool, pumping water out of the pool and through a radiator to cool down the rig. “The pool-cooling was experimental and definitely not standard,” he said. “Most miners didn't bother with water-cooling at anything beyond small scale, like a dual-purpose gaming machine.”
Eventually, Eric’s massive rig included four PCIe graphics cards that continuously chugged along, running the Bitcoin algorithm. He always operated within a mining pool—a group of miners that work together to find a block. When a block is found, the bounty is distributed among all of the miners within that pool. Different mining pools have different payout systems: Some divide the coins up evenly, while others divvy them up based on who put in the most amount of work.
“It’s hard to know if you’re being paid appropriately for your work,” Eric explained, “I pool-hopped for a couple months to level the playing field, but I don't know if it made much of a difference.”
Thanks to his experimental rig with a high output rate, Eric was able to turn a profit with Bitcoin mining—a rare feat, considering the investment he put in. But today his rig is nearly worthless. Application-specific integrated circuits— ASIC miners for short—were introduced in early 2013, and these microchips were created for one purpose, and one purpose only: to mine Bitcoins. ASIC mining rigs are smaller, faster, and consume considerably less energy than GPU mining operations like Eric’s.
However, ASIC miners hit the shelves just as Bitcoin was gaining some interest with the general public. It was moving out of the nerdy shadows and onto the pages of Forbes and Vice. The ASIC mining hardware is selling fast, and isn't widely available, but promises a ridiculous payout. Indeed, the first few ASIC miners paid for themselves in a matter of days. (Some have a selling price of $20,000.)
The future of mining
The mining community is vast, and growing every day. But newer miners to the scene will have a problem turning a profit, even with a top-of-the-line ASIC miner.
“Unless you started mining early, you’re going to fail,” said Eric. This has to do with the sheer volume of miners (competition is fierce), combined with a peculiar quality of the Bitcoin algorithm: It’s designed to make Bitcoins more difficult to create as more and more miners try to find them. A block of coins is rewarded roughly every 10 minutes, so the difficulty is dependent upon how many miners are involved. The reward also halves itself every four years, so when Eric began mining, the payout was 50 bitcoins per block, but now it’s down to 25. This ensures a steady trickle of currency. It also ensures that new miners will have a much smaller jackpot—and hit that jackpot less frequently—than those who got in early.
It's because of this growing mining pool and the new technology that Eric is moving on from mining. He went back to work, and is in the process of selling his GPU mining rig. He doesn’t think he’s out of the game forever, though. Eric says he would like to buy an ASIC miner when they’re more widely available—when “their return on investment isn’t as ridiculous as it is now."
But why put in so much energy and money for a currency that may not hold any value in the long run? Though Bitcoin is gaining some traction now, it’s hard to predict how much of an effect such crypto-currencies will actually have on a standard economy.
“It's too early to tell which alternative currency will become the dominant medium-to-long-term player,” Garrick Hileman, an economic historian at the London School of Economics, told TechHive. “On Bitcoin, my own assessment is that, over the longer term, it offers more potential as a store of value than as a widely used medium of exchange due to its capped supply and propensity to be hoarded.”
Eric agrees. “When the day comes that Bitcoin has its own set value, it will be more poised to complement national economies,” he said. Currently, Bitcoin is valued at whatever people decide they want to trade for it.
Because it is decentralized, it could also prove to be valuable in case your native country’s economy tanks. “Bitcoin is a good hedge against bad economic times ahead,” Eric said. “Everyone should own some. It might be the only thing between you and the red line.”
Do you have a Bitcoin mining tale to tell? We want to hear it. Reach out to Leah Yamshon (@leahyamshon) via Twitter.
This story, "Portrait of a Bitcoin miner: How one man made $192K in virtual currency" was originally published by TechHive.